Policy Focus:
Selected Economic Policy

Ministry of Industry and Trade
Foreign Trade Administration
Office of the Chief Scientist

June 1995

PRIVATIZATION

In Israel, as with many young nations, it was originally the state which provided the initial impetus for the development of business creation of a national capability to compete in world markets. Moreover in Israel’s case, government intervention in the economy was heightened by its complex security situation and the need to develop a sophisticated military industrial complex. However. as it matured and the private sector developed, the government has sought to reduce its involvement in the economy.

Today, there is widespread cross-party support for privatization, which has ensured that the subject is not regarded as a contentious issue.

The Government has set out six key objectives for privatization policy:

  1. To foster a greater degree of competition in the business reducing government involvement.
  2. To both improve and modernize the efficiency of state owned monopoly companies.
  3. To increase Israel’s economic integration into the world economy through attracting foreign investment.
  4. To obtain appropriate financial remuneration for government assets sold, which can then be used towards reducing the internal debt.
  5. To widen share ownership, especially among the company employees.
  6. To further develop Israeli capital markets by encouraging entrance of new investors.

The government owns about 160 companies (including subsidiaries), of which 80 are termed commercial enterprises. Their aggregate total balance-sheet assets amount to approximately $17 billion. Furthermore these 80 companies account for more than 75% of the aggregate turnover and 86% of all personnel employed in government companies. The total sales of government companies accounts for roughly 18% Israel’s G.D.P.

The amounts of capital raised by sales of government holdings have been substantial — in total over $3 billion had been raised by the beginning of 1995 with the some of the most important privatizations yet to completed.

FOREIGN CURRENCY LIBERALIZATION

The Government of Israel is progressively implementing a policy of full foreign currency convertibility. Since 1993 Israel formally accepted the obligations of Article VIII of the IMF’s Agreement, which prohibit exchange restrictions on payments and transfers for international current account transactions. Moreover, in August 1994 the Ministry of Finance announced a series of reforms that further increased Israel’s currency control regulations.

Exchange control is the responsibility of the Controller of Foreign

Exchange in the Bank of Israel, in cooperation with the Ministry of

Finance. Policy is carried out through authorized banks that are permitted to deal in foreign exchange. Other institutions, such as securities brokers and foreign exchange dealers may process a limited license to deal in foreign exchange.

The remaining restrictions are primarily on Israeli residents and corporations and in effect limit financial, as opposed to real investments overseas. Israeli companies can invest all of their paid up capital in overseas direct investment and exporters can deposit up to 10% of their annual proceeds abroad.

Residents face some limits on outward private transfers and relatively minor restrictions on tourist expenditure. Individuals may invest in foreign securities in recognized stock markets, provided they are deposited with a local bank. Foreign residents and corporations face no real restrictions provided they operate through authorized dealers.

ECONOMIC INFRASTRUCTURE INVESTMENT

In recent years the Government of Israel has promoted infrastructure development as an important means by which to facilitate economic growth. Investment in infrastructure raises productivity and lowers production costs. Consequently, the expansion of infrastructure capacity results in increased economic output.

By investing in the country’s physical infrastructure, the government has sought to enhance private sector efficiency and growth, which have been essential for encouraging immigrant absorption and increasing employment opportunities. Moreover, as the pace process progresses, Israel’s infrastructure expenditure should be seen as an investment in the region’s development as a whole.

Between 1991 and 1994, approximately $8 billion was spent on the country’s physical economic infrastructure. This scale of investment is unparalleled in Israel’s history. In 1995 alone total public sector infrastructure investment is expected to reach over $3 billion, as compared to under half that figure in 1991.

In 1995, government infrastructure expenditure will grow by an additional 10%. Investment in roads will reach $700 million, while industrial infrastructure will expand by 50% compared to 1994. Other infrastructure investment components include electricity and telecommunications, whose sources of finance are non-budgetary and are directed by public utility companies that operate in those areas.

FINANCIAL DEREGULATION

Since 1987 Israel has been engaged in a program of financial decentralization, a process designed to address specific characteristics of the Israeli financial system. The liberalization program aims to diffuse the concentrated nature of the financial system and stimulate competition, limiting government intervention and segmentation in the financial markets.

Specific reforms include the following:

  • The reduction of mandatory investment requirements for pension plans, provident funds and insurance plans;
  • Permitting of non financial firms to issue bonds;
  • Reducing reserve requirements levels;
  • Abolition of ceilings on domestic foreign exchange loans to residents and on guarantees that banks could issue on non bank loans;
  • Special credit arrangements were terminated and the Bank of Israel reduced its involvement in determining the prices of financial services.

Among the measures being implemented in order to increase competition are:

  1. Separating smaller viable units from the major banking groups,
  2. Upgrading the licenses of existing financial institutions;
  3. Privatizing the banks whose shares are still being held on the government’s behalf by trust companies.

In addition to all these steps the government has sought to reduce the banks’ potential conflicts of interest between their commercial bank activities and their provident funds and non financial sector holdings. Accordingly, the banks’ provident funds, which account for around 80% of all such funds in Israel, are not allowed to invest in their bank group shares and their decision-making authority has been separated from bank management. Banks which have substantial stakes in the non financial sector have also been required to reduce their holdings in these enterprises to no more than 25% within three years.

INVESTMENT INCENTIVES

THE ISRAEL INVESTMENT CENTER (IIC)

The Israel Investment Center (IIC) was established under the the Encouragement of Capital Investments of 1959 ("The Investment Law"). The Center’s main responsibility lies in the encourage economic initiative, industry and tourism. The Investment Center for both foreign and local Capital Investment aimed at expanding production capacity of the economy, thereby creating new employment opportunities.

APPROVED ENTERPRISE

Based on the Investment Law, the Investment Center may, on application, grant the status of "Approved Enterprise" for Capital Investments in industry and tourism. Certificates of Approval a and such approval entitles the project to receive substantial from the State. The support may be in the form of reduced investment grants, loans secured by State Guarantees a benefits specifically designed to encourage Capital Investment in Israel The company can choose one of the alternatives. The company must finance, at least, 30% of the approved project with capital equity paid in cash.

PRIORITY AREAS

Approved Enterprises may be entitled to incentives dependant upon the priority of the region in which they are situated. The State of Israel has set a goal to develop peripheral regions distant from the main centers of the country, and to encourage population migration to these areas. As a result, three priority areas have been established with differing levels of preference.

R&D INCENTIVES

SUPPORT CRITERIA FOR NEW PRODUCT DEVELOPMENT
(implemented by the Office of the Chief Scientist – OCS)

The Chief Scientist Office takes into account the following criteria in granting support:

  1. Innovativeness in the development of new technologies.
  2. Management, production and marketing capabilities of the firm, as well as a marketing strategy for the new product.
  3. Support is given to products with a high added-value which can compete on international markets.
  4. The introduction of new technology and expansion of scientific manpower.

SUPPORT LEVELS FOR R&D PROJECTS

Standard support – 50% of costs.

  • Improvements in products developed through OCS grants – 30%.
  • Products for the military market – 30%.
  • R&D in Development A zones, if researchers residents of these areas: 60%, and 45% for military products.

New startups where the only activity is R&D, and there is no source of financing other than equity provided by those performing the R&D, 66% for budgets up to $150,000. The government actively participates in new ventures through risk-sharing grants to new investors. If the investment/venture succeeds, the grant is repaid in the form of royalties.

Investment in R&D by an outside investor may be recognised by the tax authorities.

OTHER MODES OF ENCOURAGEMENT

The OCS encourages companies with a turnover of $5 million or more and/or holding companies with capital of $7.5 million, experienced in R&D, to adopt groups with new R&D initiative. The OCS will support such R&D programs with a 66% grant of up to a budget of $300,000 a year for two years. The adopted group must receive at least 30% of the new venture.

The OCS encourages the development of highly advanced generic technologies, which enable the industry to maintain its competitiveness. The level of support is 66% of the approved programs. The application and management of the said programs will be carried out by groups of industrial companies in conjunction with research institutions.

OCS supports R&D subcontracting with 20% grants to companies with a turnover of less than $6 million and whose salaries are 70% or more of the approved program.

BETA SITES

The OCS offers further aid to industries at the stage between R&D marketing when they are ready to establish "Beta sites". Studies by OCS showed that this stage-the manufacture of "industrial prototypes’ at a customer site-was often critical in the success or failure of a product. The OCS is offering aid up to 50% of approved expenses to companies with a turnover of up to $6 million for the past 3 years and 30% to, companies with a turnover up to – $30 million.

ECONOMIC FEASIBILITY STUDIES

The OCS contributes up to 50% of a $25,000 maximum budget for marketing feasibility studies surveys, and up to $30,000 to surveys of two continents and more.

THE UNIVERSITY-INDUSTRY CONNECTION

The Office of the Chief Scientist supports research in six of Israel’s institutes of higher education through the "Joint Funds," administered jointly by the Chief Scientist and the university research organizations. Approximately 50 projects a year are supported in this manner. The initial stages of research are financed by the Chief Scientist and the university research authority on a 50:50 basis. It is expected that within two or three years the project will become economically viable,

INTERNATIONAL INDUSTRIAL COOPERATION – BINATIONAL RESEARCH FUNDS

Israeli and foreign firms have much to offer one another in terms of joint ventures. Israel can offer state-of-the-art technologies, as well as favorable trade relationships with both Europe and the US. The country enjoys the advantages of Free Trade Area Agreements (FTA) with the US, the EEC and EFTA.

Israel has established binational research agreements with a number of foreign countries. These, administered through offices both in Israel and in the cooperating country, not only help from a financial point of view, but also serve as "match-making" offices, helping local firms to find suitable industrial partners abroad. Among the binational agreements ‘in effect are those between Israel and the US (BIRD-F), Canada, France and The Netherlands.

RESEARCH INSTITUTES

The OCS is associated with seven research institutes in Israel which are. involved in industrial R&D and provide industrial services-.

The Metals Institute
The Plastics Laboratory
The Institute for Ceramics and Silicates
The Rubber Research Association
The Fiber Institute
The Applied Research Institute of the Ben-Gurion University
The Toxicology Institute

BUSINESS PROMOTION

WELCOMING THE INVESTOR TO ISRAEL

The Government of Israel offers a wide range of free services to the foreign entrepreneur through its Center for Business Promotion, providing maximum information and assistance, including:

  • a data base of over 1,000 profiles of Israeli companies looking for various joint ventures with foreign partners;
  • written material on the advantages of and incentives for doing business in Israel and how to go about it;
  • assistance to the individual businessman in presenting the opportunities available in Israel, arranging meetings with potential partners, professional services and government officials;
  • ongoing follow-up during initial stages of program implementation;
  • regular update to all interested parties via a quarterly newsletter.

The Ministry of Industry and Trade’s Center for Business Promotion has a multi-faceted mission which includes the following points designed to assist potential investors in Israel:

  • Increase awareness among the international business community of Israel’s economic advantages;
  • Identify potential foreign investors;
  • Locate strategic partners for local companies;
  • Provide individualized service to investors visiting from abroad.

Globalization of the world’s economy means international strategic alliances are becoming more important. The emergence of peace in the Middle East makes Israel a gateway to the region. Economic growth means finding the best partners in the global marketplace.

FOR FURTHER INFORMATION:

MINISTRY OF INDUSTRY AND TRADE

FOREIGN TRADE ADMINISTRATION
POB 299
Jerusalem 91002
TEL 972-2-220289
FAX 972-2-243005

THE OFFICE OF THE CHIEF SCIENTIST
POB 2199
Jerusalem 91021
TEL 972-2-220587
FAX 972-2-248159